Atlantic Connection Conference

Shared Risk Plans, July 9, 2014

Response to Unfunded Pension Funds

Between 2009 and now - over 45 states have instituted pension plan modifications.

Categories of the modifications– COLA reductions and implementation contingencies– Increasing employee contributions– Higher age and service requirements– Replacing DB plan with another type of plan

• Defined contribution plan• Hybrid plan • Cash balance plan

3 Types of Risks to be Shared

Risks to be shared

Longevity Risk

Investment Risk

Inflation Risk

Types of Sharing Plans

Formal Risk Sharing Plans

• COLA contingent upon investment performance

• Higher employee contributions• longer vesting periods,• a higher age or number of years of

service required to qualify for retirement benefits

De Facto Risk Sharing Plans

Continuum of Retirement Plan Shared Risk

DB Plan, Employer

Contributions Only

DB Plan,

EE and ER Contributions

Cash balance plan, hybrid DB-DC plan, plans in which benefits or employee costs vary on the basis of such

factors as investment performance and the financial or actuarial condition of the plan

More Employer

Risk

Shared Risk

More Employee

Risk

DC Plan, EE and ER

ContributionsDC Plan, Employee

Contributions Only

Excerpted from NASRA Issue Brief, June 2014

Hybrid Retirement Plans

• DB+DC Plan – Indiana, Ohio, Oregon, and Washington - the employer finances the DB component, and the DC component is funded by mandatory employee contributions (ranging from 3 percent to 15 percent of salary).

• Cash balance plans - combines elements of traditional pensions with individual accounts into a single plan. Assets are pooled, invested by professionals, and guarantee annual returns to plan participants.